Dual Stability in a Cambridge-Type Model

Abstract

In this paper we are concerned with the dynamic properties of a multi-firm model of the Cambridge-type. The essential feature of the model is the assumption that, in making decisions concerning investments and prices, firms lack an exact knowledge of future demands and equilibrium prices. The dual stability-instability property of Leontief models (e.g. [2], [6, pp. 81-84]) or saddle-point property of neoclassical models (e.g. [1], [3]) is essentially due to the unrealistic assumption of perfect foresight. The first object of this paper is to show that, relaxing this assumption, a dual stability property for both quantities and prices holds. As firms must create output capacity for unknown future demand, excess capacity may result when out of equilibrium. But it will be shown that a certain type of investment behaviour where the firms learn from past experience would tend to adjust the structure of productive capacity to steady-state requirements. As for the price system, full cost pricing is assumed. In the short period, the firms produce as much as they can sell at fixed prices and they then revise these prices when a change in costs occurs. Furthermore, it will be assumed that the money wage rate increases at certain periods of time and that the firms pass it on in the form of higher prices. The second object of this paper is to examine under a simple Cambridge saving condition how real phenomena such as the rate of equilibrium growth, the stability of the input-output system, and the level of real wages are affected by the bargaining power of workers as well as by the monopoly power of firms.